The US has recovered, says Rowan Dartington’s Stephens

Rowan Dartington Signature’s Guy Stephens explains why fragile confidence and a slow recovery can actually benefit the economy.

Friday’s US Payroll employment data release reported that the US economy added 217,000 jobs in May compared to forecasts of 215,000, so more or less in-line. However, as with all statistics it is vital to step back and look at them in the wider context before drawing any conclusions.

There were two other headlines which were far more revealing about the health of the US labour market and therefore also that of the economy.

Firstly, this latest figure above 200,000 was the fourth in a row and that hasn’t happened for almost 15 years, and that is despite the poor weather.

Secondly, and much more of a headline, this latest figure means that the US economy has now recovered all of the 8.7 million jobs it lost in the 2007-9 recession and can officially say ‘We have recovered’.

That said, not since the Great Depression of the 1930s has it taken so long to recover all the jobs lost from a recession. But that can also be viewed in a positive light as follows below.

It is well known that economies and stock markets over and under shoot in terms of expansion and contraction, often down to the greed and fear herd instinct of the human race.

When others are making money, others wish to do the same and if liquidity is available, a bubble forms and a bust inevitably follows. When the bust arrives, fear takes over, there is a panic stampede for the exit and an oversold situation develops.

A slow and gradual recovery is actually far more desirable because it means that the risk of a new bubble developing is much reduced, especially if confidence remains fragile as this will subdue speculation.

We are all familiar with bull markets climbing a wall of worry and there has been plenty to cause upset this year without a significant sell-off. The lack of bank lending has meant that much of the liquidity injection from QE has failed to make it into the real economy and therefore has strangled the recovery.

The seasonal selling in May has not occurred and UK equity markets are threatening to break new ground despite some quite savage rotational selling and strength in the bond markets.

If we do shortly achieve new highs, the headlines could well cause investors to capitulate as we move to a higher trading range as greed takes over. July will see the reporting of the Q2 US results and if these employment numbers also continue, we could see some meaningful upside over the summer.


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